In a post on “How Blue States Subsidize Red States,” Matt Yglesias observes the following:

Transfers, on average, flow away from high-income and underrepresented areas and toward low-income and overrepresented areas. I think the overall pattern is best described as a coincidence and not a pattern of large-scale hypocrisy but there are two important points to make about it.

One is that high-income people living in low-income states are generally very conservative in their political ideology but probably benefit more from federal income support programs more than they realize. If you own fast food franchises in the Nashville area, for example, you’re going to form a self-perception as a self-reliant businessman but the existence of Medicaid and the Earned Income Tax Credit are helping to ensure that your customers have adequate income to sometimes eat at your Taco Bell. These chains of dependency snake even longer. If you sell luxury cars in Florida, many of your customers are probably medical professionals who are earning high incomes because other people have Medicare benefits. The aggregate geographic transfer patterns, in other words, do make a real difference to the economic life of the nation. The existence of transfer payments props up the entire local economies of low-income, low-productivity parts of the country.

Kudos to Matt for making the subtler rather than the cruder point. We disagree, however, on how we might help various regions and constituencies break out of this pattern of dependency.

The other point is that the fact that we don’t think of the issues in this way is important to making the overall country work. Voters, whether they’re liberal or conservative, don’t think about Boston subsidizing Louisiana. They think about high-income people (a disproportionately large number of whom happen to live in the Boston area) subsidizing low-income people (a disproportionately large number of whom happen to live in Louisiana) and debate the issues on broad ideological grounds. Absent that commitment to broad ideological thinking we’d be in roughly the situation that the European Union is currently in, with Boston-area people happy to participate in a joint economic undertaking with Louisiana to some extent but horrified by the notion that their hard work should subsidize Bayou indolence. You would then have the question of to what extent can people simply leave the low-wage, low-productivity places and move to the more prosperous ones. In the European case you’d find that the logistics of language make it hard for a middle class Greek person to get a good job in Finland, while in the United States severe zoning makes net migration to the highest-income cities impossible.

My strong suspicion is that we’d be far better off if “Boston-area people were happy to participate in a joint economic undertaking with Louisiana to some extent but horrified by the notion that their hard work should subsidize Bayou indolence,” though of course we’d want Americans to think well of each other. The scenario Matt describes is something like the competitive federalism that prevailed in the United States after the Civil War and before the New Deal, an economic regime brilliantly described in Richard Franklin Bensel’s The Political Economy of American Industrialization, 1877-1900. The great tragedy of this era was the forcible denial of civil and human rights to black Americans and women, among other marginalized groups, including private economic liberties. These basic rights should be protected by the federal government. Yet in other domains, having states raise the funds they disburse tends to encourage constructive and sustainable economic policies. And as Jason Sorens has argued, robust economic policy autonomy might also lead to higher levels of civic engagement and lower levels of rent-seeking, graft, and corruption.

In international terms, states often adopt better economic policies when faced with external pressures and constraints, e.g., a geopolitical threat. The reason is that the state in question must increase tax revenues if it is to increase its war-making capabilities, and better economic policies tend to yield higher tax revenues. This is part of why Paul Romer has suggested that charter cities should limit themselves to land value taxation. A better policy environment will help the state achieve its objectives. If, in contrast, the state could just receive transfers from other states (i.e., foreign aid), the incentives to improve the policy environment are far weaker.

This is very true in the U.S. context. If less-affluent rural regions didn’t receive large-scale transfers from affluent urban regions, we’d see a few things happen: people would migrate from the former to the latter, or rather they would migrate in somewhat larger numbers; less-affluent rural regions would focus their efforts to becoming more affluent, to retain and attract population and to maintain or increase the revenue base for high-quality public services, rather than on securing larger transfers; they’d be more mindful of the efficiency of public sector service delivery, as the money would be coming from locals.

One potential danger is that affluent urban regions might create obstacles to domestic migrants. But of course this is forbidden by our constitutional order. Some obstacles — like zoning restrictions, etc., that raise the cost of housing — aren’t forbidden, and are in fact quite common. This is the point Matt makes at the end of his post. But this isn’t a particularly strong argument against competitive federalism. Rather it is a strong argument against local land use restrictions, and perhaps an argument for repealing various federal laws that exacerbate the problem, e.g., the mortgage interest deduction, the state and local tax deduction, etc.

There are many other policies the federal government might want to reverse to facilitate this vision of competitive federalism in which states and local governments compete for citizens. Consider our approach to disaster relief, which Edward Glaeser criticized persuasively back in 2005:

Should government rebuild New Orleans? Edward Glaeser asks whether the residents would be better oﬀ with $200,000 in their pockets than to have $200 billion spent on infrastructure: shouldn’t we be insuring the people, not the place? New Orleans has been declining and its people mired in poverty for decades; its port and pipelines cannot employ a large city, and $200 billion is unlikely to change that.

Under Glaeser’s proposal, New Orleans could absolutely have attracted billions of dollars to rebuild — it’s just that the city and state governments would have to persuade residents that New Orleans is the right place to invest their $200,000, which might encourage public officials in the region to make constructive policy changes.